MARKET COMMENT: London Stocks End Lower Ahead Of Bank Stress Tests

LONDON (Alliance News) - The major UK stock indices closed lower Friday as investors took a cautious approach ahead of a weekend that brings the long-awaited results of the European Union bank stress tests. Concerns about the spread of Ebola also gave sentiment a knock after a doctor returning to the US from West Africa was confirmed to have the virus.

The FTSE 100 closed down 0.5% at 6,388.73 and the FTSE 250 down 0.3% at 15,089.55. The AIM All-Share closed fractionally higher at 709.03.

The week as a whole, however, has been a relatively strong one for London stocks, with the FTSE 100 recording its first gain for five weeks, rising 2.6% since Monday.

On Friday, major European markets also suffered losses, with the French CAC 40 falling 0.5%, and the German DAX off 0.6%. After the European close, US stocks are performing a little better, with the DJIA, the S&P 500, and the Nasdaq Composite all up about 0.3%.

The EU Asset Quality Review, or bank stress tests, are due on Sunday. Capital hoarding by the banks ahead of the tests has for months been widely blamed as part of the reason behind a lack of lending in the eurozone. While banks have been working to shore up their balance sheets, the possibility that some have failed the tests has caused some caution in the markets, especially after a report from Bloomberg on Friday that 25 banks indeed have failed. Bloomberg cited a draft communique of the final results.

Further weighing on sentiment Friday, a doctor who recently returned from volunteering in West Africa was being treated in a New York City hospital after he tested positive for the Ebola virus in the first confirmed case in the city, officials said.

Around the time of the European market close, there was some positive Ebola-related news: that the first Dallas nurse to contract the virus in now free of it and going home, according to US health officials.

Also suppressing the appetite for stocks Friday was official data from China overnight that showed a 1.3% slowdown in the housing market in September, with almost all major cities experiencing a fall in prices. Evidence of a slowdown in the Chinese economy almost always has a negative effect on global equity markets. Some analysts calculate that the housing market, and its associated businesses, account for up to 25% of Chinese gross domestic product, so the property slowdown goes a long way to explaining the fall in third quarter Chinese GDP to its lowest level in five years reported earlier this week.

The UK economy grew by 0.7% in the third quarter from the prior quarter, according to the initial estimate of GDP from the Office for National Statistics on Friday. That's a slow-down from the 0.9% growth recorded in the second quarter, but in line with expectations. Year-on-year growth was 3.0%, down from 3.2% in the second quarter, also in line with expectations.

The data did little to boost the stock market, but did provide a small boost to to the pound, which pushed to intra-day highs of USD1.6099 and EUR1.2696.

With the UK economy continuing to outperform other European economies, the EU has asked the UK government to pay an extra EUR2.1 billion towards the EU budget. Remarkably, Greece also has been asked to contribute more, while Germany will receive a rebate, according to the calculations. The request made difficult reading for UK Prime Minister David Cameron, who is seeing growing dissent within his own party over UK membership of the EU, with a number of Conservatives defecting to anti-EU party UKIP.

Within the UK stock movers Friday, Shire ended as the best blue-chip performer after using a midday release to increase its full-year earnings guidance for the third time this year. Shire reported a profit rise in its third quarter that was much better than analysts expected, and reiterated its target of doubling its product sales to USD10 billion by 2020.

Shire has always said it has maintained its business momentum throughout the ultimately doomed takeover talks with US-based AbbVie, and in its first results since being left at the altar earlier this week, the pharmaceutical company raised its non-GAAP earnings per American depositary share growth guidance to the high 30% range. At the time of its interim results the company had guided in the low-to-mid 30% range.

Pearson was the worst FTSE 100 performer, ending down 2.6% after saying Chief Financial Officer Robin Freestone will step down by the end of 2015 to explore other interests, as it eked out a 1% rise in sales in the first nine months of the year at constant currency rates. The publishing company retained its full-year guidance, but analysts said the loss of Freestone will be a knock to business.

Also in the FTSE 100, Tesco closed down another 1.4% at 168.75p Friday after JP Morgan published a negative note on the troubled supermarket, cutting its price target on the stock to 145p from 165p, while reiterating an Underweight rating. The pessimistic note comes after Tesco on Thursday confirmed the error in its first half accounts was bigger than initially thought.

FTSE 250 bank TSB Group gained 1.6%, after reporting a solid set of third quarter results. TSB said it made a GBP33.1 million pretax profit in the third quarter, up from GBP25.7 million in the previous three months. There was no consensus expectations for the quarterly results, but Jefferies said it would categorise the numbers as "fine". Shares in Lloyds Banking Group, which still owns 50% of TSB, gained 0.7%.

Spectris was the best mid-cap performer, however, gaining 4.4% despite saying its full-year results will be a little below consensus. The instrumentation and controls company said sales in its third quarter to end-September fell 5%, as growth contributed by acquisitions of 2% was offset by the strength of sterling, which had a negative effect of 7%. Jefferies said that a heavy share price fall in recent months had priced in an even-worse outcome, and the actual result was better than feared.

Pets At Home ended up 3.5% after reporting sales growth of 4.2% in both the second quarter and first half, in line with expectations.

Hikma Pharmaceuticals was the worst FTSE 250 performer, down 5.6%, after saying it received a warning letter from the US Food and Drug Administration related to a March inspection of its manufacturing facility in Portugal, although it stressed it does not believe this will impact its financial guidance for the full year. In the letter, the FDA raised issues related to investigations and environmental monitoring at the the facility, Hikma said.

The early focus of the markets on Monday is likely to be any upsets revealed over the weekend by the EU bank stress tests. Outside of that, the German October IFO business climate survey will be released in the morning, and there is US October PMI data in the afternoon.

APR Energy is scheduled to provide an interim management statement.

By Jon Darby; jondarby@alliancenews.com; @jondarby100

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